Salesforce Not Slacking on Margin Focus


A message of austerity from

Salesforce


CRM 1.91%

is welcome, though the cloud software giant picked an ironic time to share it. 

Salesforce got back into the business of packing visitors into its San Francisco hometown this week for its Dreamforce conference. The in-person aspect of the annual confab took a two-year hiatus due to the pandemic but was apparently missed; Salesforce says more than 40,000 attendees showed up this year.

Even for a company that now drops more than $13 billion a year on sales and marketing expenses, it is not a cheap undertaking. A shortage of hotel rooms in 2015 forced Salesforce to charter a 965-foot cruise chip and park it at a nearby dock to accommodate visitors. 

The company used this year’s event to announce new products and services such as

Genie,

a real-time data management platform for businesses, and a marketplace for businesses to exchange carbon credits. It also used an analyst meeting late Wednesday to unveil a plan to reach adjusted operating margins of 25% by the end of its fiscal year that closes in January 2026.

That is about 5 percentage points above what Salesforce expects for the current fiscal year and would represent a new high. Salesforce shares rose nearly 3% Thursday—one of the few gainers in the tech space. 

Embedded in that goal is a plan to reduce sales and marketing costs to less than 35% of revenue compared with about 45% now. Salesforce Chief Financial Officer

Amy Weaver

also sought to reassure investors worried about dilution from share issuance, saying that the company would “prioritize the use of our balance sheet” for major acquisitions.

Salesforce’s three largest deals to date—with transaction values totaling nearly $47 billion—have each involved significant stock components.  

Ambitious targets are nothing new for Salesforce, but those have typically involved the company’s obsession with keeping annual revenue growth above 20%. That is a taller task now, both due to size (trailing 12-month revenue is now just under $30 billion) and a slowing global economy possibly entering a recession.

Cloud software investors are also rebelling against aggressive M&A deals.

Zendesk

and Zoom Video recently had acquisition attempts voted down by their respective shareholders, and

Adobe

has shed nearly one-quarter of its market value since announcing a $20 billion deal for Figma last week. 

Salesforce has been in a bit of a penalty box as well, with its stock lagging behind the Nasdaq and major software peers since its announcement of the Slack acquisition for nearly $28 billion in December 2020. Slack had reported straight operating losses since its inception, so investors worried about the impact to the bottom line. But Slack also figures heavily into the company’s growth plans; Salesforce says its revenue target for the current fiscal year includes $1.5 billion in contribution from Slack, whose annual revenue was running just below the $1 billion level when the deal closed in mid-2021.

Salesforce may not be done buying growth, but showing the ability to do so profitably would go a long way toward lifting this particular cloud. 

Write to Dan Gallagher at dan.gallagher@wsj.com

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